With the election coming up, many might feel that the government was out to impress with the recent Budget. If impressing savers was on the agenda, George Osborne may well have succeeded. The Chancellor delivered a Budget that contained some big news for those who want to make the most of their savings, with the potential to give many of the UK’s savers a definite boost.
Savers will, however, have to wait until 2016 before the biggest boost from the budget will take effect. From April next year, savers who are basic rate taxpayers will not pay any tax on interest earned on their savings up to £1,000. Higher-rate taxpayers will benefit from a similar move, but only on the first £500 of savings interest.
Currently, savers are limited to £15,000 of savings a year that can earn tax-free interest, and then only when tucked away into a specialist interest-free ISA. Under the new system, savings will not be charged tax at all unless the interest earned exceeds £1,000 – which allows for people to hold up to £70,000 at an interest rate of 1.5% (roughly the amount paid by the best easy-access deals at present). The result will be that 95% of people in the country will be exempted from paying tax on their savings altogether, and without the need to utilise a specific type of account.
Those who earn between £10,000 and £13,000 a year will be exempt from paying tax on their savings much sooner. As of 6th April this year, the 10% starter rate on savings interest will be scrapped, leaving people in this income bracket free from tax on interest.
ISAs are also going to see a major shake-up (for the second Budget running), due to take effect at some time this Autumn. One change will allow savers to deposit funds then withdraw them again without harming their ISA allowance. Currently, if you put money in an ISA then take it out again it is still subtracted from your annual allowance as if it had remained in place. This will mark the start of a new breed of “fully flexible” ISA, giving you more choice about how to use your limit and what to do with the money you have deposited.
This April will also see the tax-free limit for ISAs slightly increased. It will rise from the current £15,000 level to £15,240 – giving savers a small boost to their tax-free savings in the year they spend waiting for all savings (up to the £1,000 interest limit) to become tax-free.